AUDIT PROCEDURES FOR CASH RECEIPTS
The importance of developing an audit program that includes thorough procedures to audit cash balances, or cash receipts, is important because it can affect an organization's profits. The auditor must perform audit procedures of the internal controls of the company to detect any shortcomings. He must also perform substantive tests of details, tests to detect lapping and analytical procedures so that he can conclude that the cash balances are reasonably accurate.
The internal controls pertinent to cash receipts transactions safeguard the organization from theft. Internal control mechanisms the auditor should check for include documents that establish accountability for the reception of cash and completion of bank deposits, an accurate daily cash summary and deposit slip, requiring daily journal entries that post the amount received to customer accounts and appropriate segregation of duties. This is the first procedure in auditing cash receipts and cash balances.
Tests to Detect Lapping
Lapping is the deliberate misappropriation of cash receipts and one of the most common means by which an employee or manager can steal from an organization. Usually the auditor only performs these tests when he believes there is a lack of internal controls. The auditor should first ensure that there is an appropriate segregation of duties, so as to best prevent lapping from occurring. He should also confirm accounts receivable balances with customers, compare the details of cash receipts with journal entries and corresponding bank deposit slips and make a surprise count of the cash on hand.
Analytical procedures help the auditor note any obvious discrepancies or errors before performing tests of details. However, these procedures do not provide any significant assurance for the auditing team or management. These types of procedures include comparing cash balances with forecasts and budgets. When cash balances greatly exceed or fall below expectations for the year, it should place the auditor on alert for items to look for during the tests of details. Other analytical procedures include reviewing company policies regarding minimum cash balances and the investment of surplus cash.
Tests to Details
There are two types of tests of details that the auditor performs when auditing cash balances -- tests of details of transactions and tests of details of balances. During the tests of details of transactions, the auditor traces bank transfers and performs cash cutoff tests. When approaching the balance sheet date, the auditor uses the cash cutoff tests to ensure that all of the appropriate transactions are included in the financial statements. Tests of details of balances include confirming bank deposits and loan amounts, obtaining bank cutoff statements to ensure all relevant cash is included in the balance, reconciling the bank account to the books, and confirming arrangements with all banks the organization uses, including those with zero balances.
An auditor may provide other types of services, other than reasonable assurance of the accuracy of a company's financial statements, to an organization. For cash receipts or cash balances, an auditor may help management forecast the cash flow and accurate projections for the subsequent year. He may also identify areas for improvement and make recommendations for short-term investment of excess cash.
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Copyright © Daniel Cullinane CPA.
Daniel Cullinane CPA
25 Plaza 5 25th fl Jersey City NJ phone 732-516-1648 fax 732-516-9778